Exploring the Chinese film market is a potentially lucrative but fraught proposition. Ryan Kavanaugh says Relativity’s links with China’s film players will build creative collaboration between East and West.

For an industry consumed by audience size, 1.3 billion is an irresistible number. It’s no surprise then that Hollywood is drawn by the prospect of breaking into the Chinese market.

It’s an attractive market, yes, but one with some obvious issues for creators and distributors of entertainment. Notorious for a mercurial censorship process, restrictive import quotas that control distribution, and cultural inscrutability, China has not always been the most hospitable market for western product. Many have tried before to enter the dragon with limited success. Now, the man who brought quantitative analysis to the creative business of film, Ryan Kavanaugh, is convinced he’s found the winning formula to thrive in the People’s Republic.

Kavanaugh, founder and CEO of Relativity Media, the studio behind films like Bridesmaids, The Fighter, The Social Network, and upcoming films Immortals and the untitled Snow White project, recently forged relationships with leading Chinese entertainment entities that put the company in prime position to get Relativity-backed content on the growing number of screens in China and to develop Chinese films. Beyond the potential for mega audiences, Kavanaugh says the deals will promote a more collaborative filmmaking relationship between the two countries and allow filmmakers to explore “global stories.”

Kavanaugh has done deals with Asian private equity firm SAIF Partners and IDG China Media that makes Relativity a partner in SkyLand Film and Television Cultural Development Ltd. The joint venture will produce, distribute and acquire Chinese material with global appeal, and has raised a $100 million fund to finance films that illuminate Chinese stories. SkyLand has also entered into a strategic partnership with Huaxia, which, along with China Film Group, is one of only two state-run organizations that all films are required to deal with for censorship and to gain distribution.

The significance of these deals lies in how the Chinese market works. The country’s quota system only allows 20 imported films to be distributed per year, resulting in intense jockeying between Hollywood studios to get their films in front of China’s 200 million potential middle class moviegoers. With SkyLand, Relativity can get films made as co-productions thereby circumventing the quota system, and gets a piece of films SkyLand distributes on behalf of other studios. Legendary Pictures, which has partnered with China’s largest independent film studio Huayi Brothers Media to launch Legendary East in 2013, is the only other studio reported to have a similar copro arrangement.

It’s the alliance with Huaxia makes things more interesting for Relativity. The other bugbear for the western film industry is censorship, a red flag concept for any red-blooded American. While this arrangement doesn’t exempt SkyLand’s films from censorship, Kavanaugh anticipates that it will foster a collaborative discussion around the process.

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By being in the room with key decision-makers, Kavanaugh hopes discussions around unacceptable content – which range from ghosts (yes, ghosts), time travel and sex, all of which are taboo, to less predictable prevailing political sensitivities – can happen in the early stages rather than once the film is complete. “It’s not that we can bypass the system per se, but it’s that we become part of the system with them. And I think the hope from their perspective is that we can help them understand the U.S. market a bit better, and then on our side, to have a partnership where you can sit in a room and say, ‘I know you want to move this scene or cut this; while you say it may hurt the key message, here’s how we see it.’ I think it opens up the dialogue between American and China a lot,” Kavanaugh says from his Malibu home, mere hours before hopping a plane to Beijing.

The evolution of the Chinese film industry in the last decade certainly make the prospect of ferrying back and forth across the Pacific more appealing.

In 2010, the country produced roughly 500 films and saw its box office increase by 64% to $1.5 billion. According to the predictions of the China Film Producer’s Association, by 2015 China will have a box office of almost $6 billion, putting it on pace to have the second largest film industry after the U.S.

If those numbers seem modest compared to the U.S.’s industry, which comes in over $10 billion, consider that China presently only has 6,200 available screens. Variety recently reported that in the last year, 313 theaters and over 1,500 screens were added, which amounts to three 450-seat theaters a day. Still, the current number of screens translates into about one for every 200,000 people versus one per 9,000 people in the U.S. Forecasts predict that within five years there will be more than 60,000 screens in China.

That’s to say nothing of the potential of the Internet market. With three quarters of Chinese cities lacking proper cinema facilities and an online population of over 480 million, the potential for online distribution is large, though rampant piracy still poses significant hurdles for the growth of online distribution.

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The hard line on distribution quotas looks to be easing soon, as well. Based on a complaint lodged by the U.S. in 2007, the World Trade Organization demanded that China end its quota system and open up its cinemas to foreign films, giving a compliance deadline of March 2011. That deadline has passed and little has changed, but many industry watchers anticipate it will ultimately have an impact.

Investment in developing a robust industry is also swift. China Film Group recently built 16 new studios, and China has the world’s largest film studio – Hengdian World Studios. Crews are becoming more skilled (and as a result, no longer cheap), and with the creation of Tianjin Film Studio to produce Sun Lijun’s Legend of the Rabbit, which borrows liberally from Kung Fu Panda, China now has its first high-quality animation studio.

Patrick Frater, CEO and Co-Founder of Film Business Asia, says the appeal is that China is the last remaining big growth market. “One of the things that’s striking about China is that there’s a huge appetite for quality entertainment. Cinema tickets cost as much as they do in North America and yet that’s a lot of money for a lot of people. But it’s an aspirational thing, which it no longer is in the west,” says Frater, who recently moderated as session at the Toronto International Film Festival called “China Rising: New Developments and Opportunities in the Chinese Film Industry,” a session that included Kavanaugh.

Ongoing human rights issues make production in China a significant risk; Relativity’s first SkyLand production, 21 And Over shot in the Chinese city of Linyi, where activists say that a local civil rights lawyer has been detained. France- and Beijing-based Isabelle Glachant, CEO of Chinese Shadows and producer of 11 Flowers, offered a word of caution while at TIFF to those who think that China is a harvest ripe for the picking. “China is not a dreamland, it’s a jungle. If you like adventure, it’s worth trying to go and see what’s possible, but you have to be strong and ready to spend a lot of time.”

Kavanaugh says he doesn’t see the opportunity with SkyLand as a one-way distribution street towards a giant cash cow (though the prospect likely doesn’t offend). The idea, he says, is to “look for films with strategic crossovers to show the world that there are ways to make films that can be extremely successful in China and extremely successful in the U.S. That might be Chinese myths or U.S. cultural stories as long as they make for really great global stories.” If the SkyLand and Huaxia deals afford Relatively greater ease operating in China, then Relativity’s distribution footprint and knowledge of the U.S. market allow Chinese films easier access to the west.

Some like Glachant question whether trying to appeal to two vastly different cultures will yield positive results. Nuances in how stories are told can often get lost in translation. “The Chinese have a very teenage way of seeing relationships, like how a guy looks at a girl or gives her a flower; it’s not very romantic. We move a little faster,” she says.

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But to Kavanaugh’s mind it’s not about changing sensibilities. “At the end of the day, you’re never going to change what’s appealing to people to buy tickets. Meaning you’re not going to convince 1.3 billion people to like something they’re not going to like. They’ve grown up in that culture and they’re going to like what they’re going to like,” he says.

Instead, the ambition is to find stories that are universal to both cultures. “There are a lot of global stories that have never been exploited because people have been scared about approaching the China market; it’s been such an unknown barrier.”

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About the author

Rae Ann Fera is a writer with Co.Create whose specialty is covering the media, marketing, creative advertising, digital technology and design fields. She was formerly the editor of ad industry publication Boards and has written for Huffington Post and Marketing Magazine